Accounting Basics: Branches Of Accounting

By Bob Schneider

Accounting can be divided into several areas of activity. These can certainly overlap and they are often closely
intertwined. But it's still useful to distinguish them, not least because accounting professionals tend to organize themselves
around these various specialties.

Financial Accounting
Financial accounting is the periodic reporting of a company's financial position and the results of operations to external
parties through financial statements, which ordinarily include the balance sheet (statement of financial condition), income
statement (the profit and loss statement, or P&L), and statement of cash flows. A statement of changes in owners' equity is
also often prepared. Financial statements are relied upon by suppliers of capital - e.g., shareholders, bondholders and
banks - as well as customers, suppliers, government agencies and policymakers. (To learn more on this read, What You
Need To Know About Financial Statements.)

There's little use in issuing financial statements if each company makes up its own rules about what and how to report.
When preparing statements, American companies use U.S. Generally Accepted Accounting Principles, or U.S. GAAP. The
primary source of GAAP is the rules published by the FASB and its predecessors; but GAAP also derives from the work
done by the SEC and the AICPA, as well standard industry practices. (For more on this see, What is the difference between
the IAS and GAAP?)

Management Accounting
Where financial accounting focuses on external users, management accounting emphasizes the preparation and analysis of
accounting information within the organization. According to the Institute of Management Accountants, it includes "
designing and evaluating business processes, budgeting and forecasting, implementing and monitoring internal controls,
and analyzing, synthesizing and aggregating informationto help drive economic value."

A primary concern of management accounting is the allocation of costs; indeed, much of what now is considered
management accounting used to be called cost accounting. Although a seemingly mundane pursuit, how to measure cost is
critical, difficult and controversial. In recent years, management accountants have developed new approaches like activity-
based costing (ABC) and target costing, but they continue to debate how best to provide and use cost information for
management decision-making.

Auditing
Auditing is the examination and verification of company accounts and the firm's system of internal control. There is both
external and internal auditing. External auditors are independent firms that inspect the accounts of an entity and render an
opinion on whether its statements conform to GAAP and present fairly the financial position of the company and the
results of operations. In the U.S., four huge firms known as the Big Four - PricewaterhouseCoopers, Deloitte Touche
Tomatsu, Ernst & Young, and KPMG - dominate the auditing of large corporations and institutions. The group was
traditionally known as the Big Eight, contracted to a Big Five through mergers and was reduced to its present number in
2002 with the meltdown of Arthur Andersen in the wake of the Enron scandals. (For further information see, An Inside
Look At Internal Auditors.)

The external auditor's primary obligation is to users of financial statements outside the organization. The internal auditor's
primary responsibility is to company management. According to the Institute of Internal Auditors (IIA), the internal
auditor evaluates the risks the organization faces with respect to governance, operations and information systems. Its
mandate is to ensure (a) effective and efficient operations; (b) the reliability and integrity of financial and operational
information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts.

Tax Accounting
Financial accounting is determined by rules that seek to best portray the financial position and results of an entity. Tax
accounting, in contrast, is based on laws enacted through a highly political legislative process. In the U.S., tax accounting
involves the application of Internal Revenue Service rules at the Federal level and state and city law for the payment of
taxes at the local level. Tax accountants help entities minimize their tax payments. Within the corporation, they will also
assist financial accountants with determining the accounting for income taxes for financial reporting purposes.

Fund Accounting
Fund accountingis used for nonprofit entities, including governments and not-for-profit corporations. Rather than seek to
make a profit, governments and nonprofits deploy resources to achieve objectives. It is standard practice to distinguish
between a general fund and special purpose funds. The general fund is used for day-to-day operations, like paying
employees or buying supplies. Special funds are established for specific activities, like building a new wing of a hospital.

Segregating resources this way helps the nonprofit maintain control of its resources and measure its success in achieving
its various missions.

The accounting rules for federal agencies are determined by the Federal Accounting Standards Advisory Board, while at
the state and local level the Governmental Accounting Standards Board (GASB) has authority.

Forensic Accounting
Finally, forensic accounting is the use of accounting in legal matters, including litigation support, investigation and dispute
resolution. There are many kinds of forensic accounting engagements: bankruptcy, matrimonial divorce, falsifications and
manipulations of accounts or inventories, and so forth. Forensic accountants give investigate and analyze financial
evidence, give expert testimony in court and quantify damages.

Accounting Basics Introduction to Accounting

Types of Accounting
inShare
As a result of economic, industrial, and technological developments, a number of specialized
fields in accounting have emerged.

The famous branches or types of accounting are:

1. Financial Accounting

Financial accounting involves recording and classifying business transactions, and preparing and
presenting financial statements to be used by internal and external users.

In the preparation of financial statements, strict compliance with generally accepted accounting
principles or GAAP is observed. Financial accounting is primarily concerned in processing
historical data.

2. Managerial Accounting

Managerial or management accounting focuses on providing information for use by internal

users, the management. This branch deals with the needs of the management rather than strict
compliance with generally accepted accounting principles.

Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas.

3. Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the
recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process.

Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations.

4. Auditing

External auditing refers to the examination of financial statements by an independent party with
the purpose of expressing an opinion as to fairness of presentation and compliance with GAAP.
Internal auditing focuses on evaluating the adequacy of a company's internal control structure by
testing segregation of duties, policies and procedures, degrees of authorization, and other
controls implemented by management.

5. Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns. It also involves determination of income tax and other taxes, tax
advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax
decisions, and other tax-related matters.

6. Accounting Systems

Accounting systems involves the development, installation, implementation, and monitoring of

accounting procedures and systems used in the accounting process. It includes the employment
of business forms, accounting personnel direction, and software management.

7. Fiduciary Accounting

Fiduciary accounting involves handling of accounts managed by a person entrusted with the
custody and management of property of or for the benefit of another person. Examples of
fiduciary accounting include trust accounting, receivership, and estate accounting.

8. Forensic Accounting

Forensic accounting involves court and litigation cases, fraud investigation, claims and dispute
resolution, and other areas that involve legal matters. This is one of the popular trends in
accounting today.

Focusing on Specializations

If you want to focus on a specialization, you may want to consider obtaining an accounting
certification in your chosen field. It will give you an edge over those who are uncertified. Due to
the increasing population and demand for competitive professionals, you need to step it up a little
to get recognized.
Some of the most famous certifications include the Certified Public Accountant (CPA), Certified
Management Accountant (CMA), Certified Internal Auditor (CIA), Certified Financial Planner
(CFP), and Certified Information Systems Auditor (CISA).

Different Branches of Accounting:

Accounting operates within a broad socio-economic environment, and so, the knowledge required of the
accountant cannot be sharply compartmentalized.It is therefore, difficult to discuss one area without
relating to other areas of knowledge. We place a great emphasis on the conceptual knowledge. The
accountant should not only know but he should understand.
From the above it is clear that to define accounting as such, is rather difficult. Many accountants have
defined Accounting in very many languages. However, we can consider the following definitions:
1.H.Chakravorty: Accountancy is the science of recording, classifying and summarizing transactions so
that relation with outsiders is exactly determined and result of operation during a particular period can
be calculated, and the financial position as the end of the period may be shown.
2.A.I.C.P.A.: "Accountancy may be defined as the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events, which are in part, at least of financial
character, and interpreting the results thereof".
3.Taylor and Shearing: "Accounting may be defined as the art and science of recording business
transactions in a methodological manner so as to show: (a) the true state of affairs of a business of a
particular period of time and, (b) the surplus or deficiency which has accrued during a specific period."
It may be very aptly pronounced now-a-days that due to the spectacular development in the research
and analytical aspects, Accounting, in the present day, has not confirmed itself to only record-keeping
but has spread its branches to the farthest corners of commercial activities. As such, Accounting to-day,
may be divided as follows:
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their
subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of
the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.
2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books
and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of
Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and
programmes for smooth running of this part of Accounting procedures and to act accordingly are, in
short, the functions of the Accountant. This of his work is generally termed as accounting.
3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in
hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the
sale-price of the products, to prepare the budget and thereby to help in cost control etc.
These functions are the functions of the Cost Accountant.
4. Management Accounting: The present-day Management is very much dependent on the Accountant
in all the levels of managerial activities. By furnishing regular reports regarding various necessary
information required daily by the management, the Accountant very ably helps in their work. Cost
Control, Quality Control, Budgetary Control, Planning etc.are therefore, the functions of the
Management Accountant.
5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares
and presents necessary information to the Management for making decisions. This function is one which
has developed a great during the recent years. As and when there arises a particular problem in any
business unit, the accounting personnel are thereupon called to present the necessary information in all
possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial
Accounting.
6.Household Accounting: With the development of the Socialistic Pattern of economy and the
emergence of the Welfare States, the present-days Governments in all the countries in the World are
becoming more and more interested in collecting taxes not only form the corporate bodies of form the
employed persons but also from the self-employed men and professional personalities. These types of
persons are now required to maintain their professional accounts Household Income and Expenditure
Accounts separately.
7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This
is because in Welfare States is present day World, any Government has to collect taxes, compute
National Income, fix the Gross National Product Target, ascertain the Balance of Payments position
etc.governments, therefore have their own system of Accounting which is called Government
Accounting.
8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved.
For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime
entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as
well as for the Government which will collect taxes on the basis of the Published Accounts.

Branches of Accounting
Accounting Definition

A systematic record of the daily financial events of a business leading to presentation of a

complete financial picture is known as accounting

Accounting has been divided into three branches, financial accounting, cost accounting, and
management accounting and each branch of accounting is inter related with other branch. No
one branch is perfect without other branch of accounting.

Financial Accounting

The Accounting system concerned only the financials state of affairs and the financial results of
operations. This is called financial accounting. It includes preparation of accounts (Journal,
Subsidiary books, ledger and Trail Balance) on historical basis and Provides Financial
Statements (Profit & loss Account and Balance Sheet). It presents a general idea of the
working of the business and permits management to control in general way the major functions
of a business, viz. finance, administration, production and distribution.
The main object of Financial Accounting is to find out the profitability and financial position of
the organization and it is provided to Insiders (Owners and Employees) and outsiders (creditors,
banks and Financial Instructions) of the organization.

Cost Accounting

Cost Accounting means ascertain the cost of the product and to help the management in the
control of cost. Cost of individual jobs and Products reports not available in Financial
Accounting. So Cost Accounting was developed.

The main object of Cost Accounting is to find out the cost of goods produced or services
rendered by business. It also helps the management to detect and control all leakages, defective
works, and wastage in tools and stores. Cost Accounting information useful at time of making
numerous decisions and for exercising control over the costs being occurred. Cost Accounting
basically involves estimating costs in advance and detailed analysis.

Management Accounting

Third branch of accounting is Management Accounting. Accounting which provides

necessary information to the management for to take decisions and to control various business
activities. The primary objective of Management Accounting is to supply relevant information
at appropriate time to the management to enable it to take the decisions and effect control.

It means such accounting as will enable management to discharge its functions properly, chiefly
in respect of forecasting and budgeting, control over costs and revenues decisions, both routine
and strategic.

Branches Accounting Process and Reports

Financial Cost Accounting Management

Accounting Accounting
Journal Cost Sheet Trend Analysis
Subsidiary Books Material Cost Ratio Analysis
Ledger Labour Cost Funds flow statement
Analysis
Trail Balance Other Expenses Cost Cash flow statement
Analysis
Reports Reports Reports
Profit and Loss Standard Cost Report Budgetary Reports
Account/Income and
Expenditure statement
Balance Sheet Variance Report MIS Report
Break Even Analysis Interpretation
Managerial cost report
Price determination
report